Providence Chapter 9 inevitable, Central Falls receiver says

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Providence, Rhode Island’s capital and biggest city, probably will seek bankruptcy court protection to deal with a budget deficit, Robert Flanders, the state-appointed receiver for nearby Central Falls, said Tuesday.

“I don’t see how they can get out of it without going there,” said Flanders, a former state Supreme Court justice and a partner at Hinckley, Allen & Snyder LLP in Providence. He put Central Falls into bankruptcy in August and has since torn up contracts with city workers and cut pension benefits.

Providence Mayor Angel Taveras has put pressure on Brown University and other nonprofit organizations to help close a budget gap of at least $20 million, while Governor Lincoln Chafee is pressing lawmakers for action on measures to curb municipal pension costs. Unsustainable retiree expenses helped push Central Falls into insolvency. Moody’s Investors Service cut Providence debt a step to Baa1, third-lowest investment grade, this week citing its “strained” finances.

“Bankruptcy is not the preferred option for restoring Providence’s fiscal health; it is the last option, and I will do everything in my power to prevent it from happening,” Taveras said in a statement in response to a request for comment on Flanders’ remark. “I respectfully disagree with Judge Flanders that bankruptcy is unavoidable.”

Chapter 9 bankruptcy may become more common in the near future, Flanders said in an interview before a Bond Buyer conference on distressed cities in Philadelphia. Once municipal officials become aware of how useful a tool court protection can be, it will be hard to resist, he said, suggesting as many as 20 cities a year may take the option, if it’s open to them.

“Cities are starting to challenge what they’re going to pay and not pay,” said Jon Schotz, a portfolio manager with $400 million in munis under his control at Saybrook Capital LLC in Santa Monica, California, during a panel discussion at the conference. “It’s going to be a bit of a new world over the next three to four years.”